The Best Time to Start Taking Social Security

All potential Social Security recipients face this question at some point:  When should I file for benefits?

For Social Security retirement benefits, age 62 is the earliest that you can file for benefits.  By filing at this age, you will receive benefits at a reduced amount – perhaps as much as a 30% reduction.

Waiting until your Full Retirement Age (FRA) to file will allow you to receive the unreduced benefit amount. FRA is age 66 for folks born between 1945 and 1954; for those born in 1955 and later, FRA gradually increases to age 67 for those born in 1960 or later.  You could also wait until age 70 to file for benefits, which would result in an overall increase to your monthly benefit amount, by as much as 32%.  Granted, by delaying you will have foregone several years’ worth of payments, but on average it all works out about the same (with a few exceptions).

This is because the reductions for filing early and the increases for filing later are based upon actuarial tables. With these calculations, the benefit amounts at various ages are designed to pay approximately the same amount throughout your expected lifetime, according to the actuarial tables.

So if you start receiving your benefit earlier, even though it is reduced you’re receiving it for a longer period of time versus filing at a later age.  On the other hand, if you delay filing until FRA or age 70, your benefit is greater each month, but you’ll be receiving it for a shorter period of time.  Eventually these strategies “cross over” – that is, one method begins to work more in your favor than another – at around age 80 to 82.

What that means is that filing earlier at the reduced rate will pay you more in overall benefits up to (approximately) age 80 to 82, at which point the later filing ages will begin paying you more over your lifetime.  If you take into account the annual cost-of-living adjustments (COLAs), the break-even point is actually a bit lower, possibly as early as age 76.  This is due to the fact that the COLA is a percentage applied to your monthly benefit – and if your monthly benefit is reduced by filing early, your COLA adjustments will be smaller as well, and vice versa when you file later.

So if you plan to live past age 76, it is very likely in your best interest to wait until the latest point to file for your benefit. This is assuming that you have other income resources to sustain you while you delay, of course.  And if you need more reasons to consider delayed application, read on.

Taxation

Social Security benefits receive very favorable treatment for purposes of income taxation, especially when compared to other sources of income in retirement. Depending on your other income, your Social Security benefit could be completely untaxed – or at the maximum, it is only included in income at an 85% rate. Pretty much all other income, save for municipal bond income or Roth IRA distributions (both of which are generally tax-free), is 100% included for the purposes of income tax.

What this means is that as you look at all possible sources of income in retirement, it makes a great deal of sense to maximize the Social Security benefit amounts, thereby reducing the tax on your overall income stream. If you can cause an increase in Social Security benefits by up to 32% by delaying your filing, you’re effectively increasing your tax-free income. This will reduce your taxes long into the future. 

Survivor Benefits

An additional reason that you might want to delay applying for your benefit is if you have family members that will depend upon your benefit upon your passing.  This is because your surviving dependents’ benefits are based upon the actual benefit that you were receiving at your death.  So, if you delay filing for benefits and therefore are receiving a higher benefit amount, your surviving spouse (and other family members, if eligible) will receive a higher benefit amount for the remainder of his or her life, assuming that the Survivor Benefit is greater than his or her own retirement benefit.

This gives you another reason that delaying benefits could be the better option.  Otherwise, if your benefit is the same as or smaller than your spouse’s benefit, or if you don’t have a spouse, then it’s up to you: if you think you’ll outlive the average, it’s better to wait.  If you don’t think you’ll live that long, then start as early as you like.

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